The Week Ahead - Expect More Market Weakness
My reasoning for a market slowdown is a combination of psychology and reality. I think, globally, everyone now expects recession. Meanwhile, money is flowing away from investments and into cash
Recessions and moving into cash tend to move hand in hand. And every dollar going into money markets is a dollar that is moving away from the stock market.
The world in recession
According to a recent report by JP Morgan, ~85% of global GDP is in the hands of the US (31%), Japan (14%) and Europe (40%). http://www.ism.ws/files/ISMReport/JPMorgan/JPMorganMfg-Svcs050608.pdf
These countries are also expected to face recession in the next 12 months, if not sooner.
The impact of a slowdown will affect China as well, but maybe not in the way you imagine. Exports are not the major driver of China's GDP: investment is. Exports are 10% of GDP while investments are 40%. http://www.economist.com/finance/displaystory.cfm?story_id=10429271 But if the world suffers a slowdown in consumption, that investment will slow as well. And let’s not forget that post-Olympics, government spending will slow.
I focus on a slowdown because it strikes me that the current picture of stagflation (runaway inflation and recession) may morph into plain old recession. That is: inflation will go away.
My thinking is that inflation in food, energy, and steel is more about speculation than demand. Yes, demand is there and it is strong and growing. There is no denying that Chinese consumption of meat is rising, a long term trend. But the recent and sudden price surge is speculative driven. Food and oil are the new bubble mania.
The assumption is that, in a downturn, people have to eat and use energy. Moreover, demand for these is inelastic in the short-run. Charge anything and people will still pay. But that thinking is wrong.
Look at US consumers and oil. According to recent reports, US drivers drove 11 billion fewer miles in April 2008 than April 2007.
http://www.marketwatch.com/news/story/americans-drive-11-billion-fewer/story.aspx?guid=%7B93E83ED2-0EE6-48BF-B104-D82FE8A93D70%7D
At 4.3%, that's the largest drop on record. If this trend continues, global oil tips into oversupply. Add in slackening demand in other countries, and we have ongoing oversupply. Suppliers are more addicted to selling oil than we are to buying it.
The rules of supply & demand won't drop prices for a while, assuming even that consumption drops. Speculators have contracts locking in higher prices. Which means it’s too soon to short oil (DUG).
The same with food and other commodities like steel. A slowdown in consumption will ease demand. Meanwhile, production is surging for all commodities. Expect major oversupply in one year.
But today, not a year from now, the boom continues in agriculture and energy. The problem I am facing is that the stocks I want are over bought. I’d prefer to wait for a pullback, and I think this week will provide one.
Recessions and moving into cash tend to move hand in hand. And every dollar going into money markets is a dollar that is moving away from the stock market.The world in recession
According to a recent report by JP Morgan, ~85% of global GDP is in the hands of the US (31%), Japan (14%) and Europe (40%). http://www.ism.ws/files/ISMReport/JPMorgan/JPMorganMfg-Svcs050608.pdf
These countries are also expected to face recession in the next 12 months, if not sooner.
The impact of a slowdown will affect China as well, but maybe not in the way you imagine. Exports are not the major driver of China's GDP: investment is. Exports are 10% of GDP while investments are 40%. http://www.economist.com/finance/displaystory.cfm?story_id=10429271 But if the world suffers a slowdown in consumption, that investment will slow as well. And let’s not forget that post-Olympics, government spending will slow.
I focus on a slowdown because it strikes me that the current picture of stagflation (runaway inflation and recession) may morph into plain old recession. That is: inflation will go away.
My thinking is that inflation in food, energy, and steel is more about speculation than demand. Yes, demand is there and it is strong and growing. There is no denying that Chinese consumption of meat is rising, a long term trend. But the recent and sudden price surge is speculative driven. Food and oil are the new bubble mania.
The assumption is that, in a downturn, people have to eat and use energy. Moreover, demand for these is inelastic in the short-run. Charge anything and people will still pay. But that thinking is wrong.
Look at US consumers and oil. According to recent reports, US drivers drove 11 billion fewer miles in April 2008 than April 2007.
http://www.marketwatch.com/news/story/americans-drive-11-billion-fewer/story.aspx?guid=%7B93E83ED2-0EE6-48BF-B104-D82FE8A93D70%7D
At 4.3%, that's the largest drop on record. If this trend continues, global oil tips into oversupply. Add in slackening demand in other countries, and we have ongoing oversupply. Suppliers are more addicted to selling oil than we are to buying it.
The rules of supply & demand won't drop prices for a while, assuming even that consumption drops. Speculators have contracts locking in higher prices. Which means it’s too soon to short oil (DUG).
The same with food and other commodities like steel. A slowdown in consumption will ease demand. Meanwhile, production is surging for all commodities. Expect major oversupply in one year.
But today, not a year from now, the boom continues in agriculture and energy. The problem I am facing is that the stocks I want are over bought. I’d prefer to wait for a pullback, and I think this week will provide one.
posted by Andrew at
11:55 AM
1 Comments:
Can you please publish your target stock list?
Post a Comment
Subscribe to Post Comments [Atom]
<< Home